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Real Time Insight

Euro-zone GDP declined 0.6% in the last quarter of 2012, quarter on quarter, or 2.3% annualized. This was the third consecutive quarterly decline and the fastest rate of decline since the height of financial crisis in 2009.

Increasing unemployment and fiscal tightening are already impacting domestic consumption in the region. Further, rising Euro has made European exports expensive hurting their competitiveness.

Last month, the IMF revised downwards its estimate for Euro-zone GDP to a contraction of 0.2% for 2013 from its earlier estimate of an expansion of 0.2%.

The situation in the Euro-zone has somewhat stabilized since European Central Bank’s pledge last year to do “whatever it takes” to preserve the union. As a result of renewed confidence, the Euro has appreciated significantly in the last six months—up 9.13% against the U.S. Dollar.

While French President has called for establishing an exchange rate policy, the German policy makers are against any exchange rate intervention. Not surprising since German companies have more flexibility to raise prices (due to composition of German exports) as well as to reduce costs (agreements with labor unions).

According to Deutsche Bank estimates, German exports can remain competitive with Euro at $1.79, while French and Italian exports suffer at $1.24 and at $1.17 respectively.

Do you think that Euro’s strength will further hurt Euro-zone’s chances of rebounding anytime soon?

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